When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Shenzhen Tianyuan DIC Information Technology (SZSE:300047) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shenzhen Tianyuan DIC Information Technology:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.044 = CN¥166m ÷ (CN¥7.0b - CN¥3.2b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Tianyuan DIC Information Technology has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 3.2% generated by the Software industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Tianyuan DIC Information Technology's ROCE against it's prior returns. If you'd like to look at how Shenzhen Tianyuan DIC Information Technology has performed in the past in other metrics, you can view this free graph of Shenzhen Tianyuan DIC Information Technology's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Tianyuan DIC Information Technology's ROCE Trend?

In terms of Shenzhen Tianyuan DIC Information Technology's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shenzhen Tianyuan DIC Information Technology becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Shenzhen Tianyuan DIC Information Technology's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shenzhen Tianyuan DIC Information Technology does have some risks though, and we've spotted 2 warning signs for Shenzhen Tianyuan DIC Information Technology that you might be interested in.

While Shenzhen Tianyuan DIC Information Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.